Who do governments owe money to?
50 billion against the crisis: where does the money for the government's aid package come from?
In the end everything went quickly. Within two days, the turquoise-green government coalition agreed to increase the aid package for the economy again. The list of previous and new measures can make you dizzy.
Ten billion for short-time work have already been promised. One billion get municipalities, another billion comes from the hardship fund for companies. The lowering of the first stage of income tax costs 1.6 billion euros, and the new child bonus costs 360 million euros.
If you think of each of these expenses as a river, you could say: The government has opened all locks to fill a large lake. The aid adds up to 50 billion euros.
But: Not all the funds are actually flowing, some of the tributaries to the lake are still dry. The total amount of aid includes seven billion euros in guarantees that the state issues for companies to take out loans from private banks. Ideally, when the companies repay these loans, these guarantees will never come off.
At least another six billion consists of tax deferrals that the state has granted companies. Even this money has not yet been lost for the tax authorities, because taxes have to be paid back. But even if you fully subtract these items from the total, a good 37 billion euros remain.
Where does this money come from, what do you find when you travel upstream and look for the sources? The first stop of the journey leads to Markus Stix.
The first inflow
The Treasury may pay out the millions to businesses and families. But Stix is responsible for ensuring that the republic has enough liquid funds: The manager is responsible for all money operations at the Austrian Federal Finance Agency. The past few weeks have been hectic for him.
Due to the crisis, Austria will earn significantly less than it has to spend. Stix is operationally responsible for closing this gap. He and his team should raise a little more than 32.5 billion euros on the market for the Republic of 2020. So it was planned at the beginning of the year. Currently, as a result of the crisis, 60 billion have already been announced. There could be more. Not all government measures have yet been taken into account. In return, some of what is planned could cost less.
The state financing agency has already taken out 26 billion euros in loans on the market this year: The agency issues bonds for this, which are tradable promissory notes, i.e. securities. Investors pay for it. In return, the state promises to repay the total amount in five, ten, 30 or rarely in 100 years. Investors receive interest for this - more on that later.
A new influx is gaining in importance
Funds, insurance companies and pension funds from home and abroad usually buy the papers of the republic. It was the same in the past few months. Pension funds are required by law to invest in safe government bonds. Austria is a safe debtor. So this is the first and most common source for the flow of money.
Foreign central banks, for example from Switzerland, Japan, Saudi Arabia and China have recently made unusually large purchases. Twenty percent of all loans for Austria came from them this year. Central banks buy foreign bonds in order to depress the value of their own currency or to be able to securely invest cash reserves. The latter is obviously particularly in demand in these turbulent times.
Domestic banks also have more government bonds on their books than before. The reason for this is that citizens are saving.
Shops were closed in March and April, customers could not buy cars or stroll in shopping streets. At the same time, less money is being spent because the crisis is creating uncertainty: Those who are afraid of losing their job are less generous. On average over the past few years, households in Austria have saved seven to eight percent of their income. According to the Oesterreichische Nationalbank, it will be 13 percent this year.
It's bad for the economy because the money doesn't go into consumption or investment. The funds often end up in the bank account, Austrians are uneasy about stocks. The banks do not want to hoard the money because they pay penalty interest for it at the European Central Bank. So you invest it, for example in safe government bonds like Austrian ones. This phenomenon is taking place worldwide: the savings rate is increasing in all industrialized countries.
The first source of money was funds and insurance, then foreign central banks. The third are private savers. But that's just one part of the story. The main source is elsewhere.
When Austria issues a bond and banks such as Nomura, Barclays, Deutsche, JPMorgan or the Erste strike, they only hold a large part of the paper for a short time. They give money to the republic, but soon get it back by reselling the paper on the market. To whom? To the republic. To Thomas Steiner.
He and his team, made up of a handful of securities dealers at the Oesterreichische Nationalbank, have invested almost ten billion euros in Austrian government bonds over the past six months. We remember: the republic borrowed 26 billion euros this year. More than a third of this came from its own central bank.
An infinite source ...
Steiner and his colleagues take the money out of nowhere: They create it, as central bankers say, create it anew at the push of a button. Of course, you don't do this on your own. In response to the crisis, the European Central Bank has launched an emergency program, the Pandemic Emergency Purchase Program.
The central banks of the Eurosystem will buy securities worth 1,350 billion euros by June 2021, especially government bonds. The activities of the Oesterreichische Nationalbank are part of it. The money is to be used to raise inflation in the eurozone to almost two percent.
In the euro zone, as in most other countries, the central banks do not buy directly from the state, but via private investors. In normal times, this should enable control: the banks will only give cheap money to those states that they trust, that is, that do business sensibly, so the idea. "This mechanism is currently largely suspended," says Patrick Krizan, an analyst at Allianz Versicherung.
Public institutions such as central banks currently hold half of the public debt of developed countries. That's a record. In addition to the ECB, other central banks such as the Fed in the USA, the Bank of Japan and the Bank of England are also buying up massive amounts of government promissory notes. One consequence of this is that interest rates have continued to fall.
... fills the lake fastest
Since too much is being saved around the world, interest rates have been getting lower and lower for decades. The central banks are only reinforcing this trend: when there is a lot of demand for bonds, the price of the paper rises, which automatically causes the interest rates to fall. As a result, the higher debt caused by Corona currently does not play a role.
Austria pays slightly negative interest on the loans taken out so far in 2020. Say: creditors even give us money so that we get into debt. If interest accrues on some bonds, the money goes back to the state. Since we owe a large part of the debt to ourselves, we also pay some of the interest to ourselves.
The money cycle makes it possible to provide currently urgently needed sums for the economy at zero cost.
What are the downsides?
Ideally, developed countries will grow out of debt when the pandemic is over. One risk is that the financial system will become more unstable, as analyst Krizan says. Interest now only yields risky securities: Investors must therefore seek more risk in order to find returns. The big unknown is inflation. If the economy gets going in 2021, and companies and customers start consuming and investing again, could prices start to rise rapidly?
There is more central bank money in circulation. If wages and private sector credit demand rose sharply, the risk would be. Economists like Barry Eichengreen at the University of Berkeley don't see such a scenario in the near future. The wounds from the pandemic are too deep. It will take some time before the crisis is over. (András Szigetvari, June 20, 2020)
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